levvalue - Debt and Value: Beyond MillerModigliani A s w a...

Info iconThis preview shows pages 1–8. Sign up to view the full content.

View Full Document Right Arrow Icon
Aswath Damodaran 1 Debt and Value: Beyond Miller- Modigliani Aswath Damodaran Stern School of Business
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Aswath Damodaran 2 The fundamental question: Does the mix of debt and equity affect the value of a business? Assets Liabilities Assets in Place Debt Equity Fixed Claim on cash flows Little or No role in management Fixed Maturity Tax Deductible Residual Claim on cash flows Significant Role in management Perpetual Lives Growth Assets Existing Investments Generate cashflows today Includes long lived (fixed) and short-lived(working capital) assets Expected Value that will be created by future investments Different Financing Mix? Different Value?
Background image of page 2
Aswath Damodaran 3 Approaches to Valuation Discounted cashflow valuation , relates the value of an asset to the present value of expected future cashflows on that asset. Relative valuation , estimates the value of an asset by looking at the pricing of 'comparable' assets relative to a common variable like earnings, cashflows, book value or sales. Contingent claim valuation , uses option pricing models to measure the value of assets that share option characteristics.
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Aswath Damodaran 4 Valuation Models Asset Based Valuation Discounted Cashflow Models Relative Valuation Contingent Claim Models Liquidation Value Replacement Cost Equity Valuation Models Firm Valuation Models Cost of capital approach APV approach Excess Return Models Stable Two-stage Three-stage or n-stage Current Normalized Equity Firm Earnings Book Revenues Sector specific Sector Market Option to delay Option to expand Option to liquidate Patent Undeveloped Reserves Young firms Undeveloped land Equity in troubled firm Dividends Free Cashflow to Firm
Background image of page 4
Aswath Damodaran 5 Discounted Cashflow Valuation: Basis for Approach where CF t is the expected cash flow in period t, r is the discount rate appropriate given the riskiness of the cash flow and n is the life of the asset. Proposition 1: For an asset to have value, the expected cash flows have to be positive some time over the life of the asset. Proposition 2: Assets that generate cash flows early in their life will be worth more than assets that generate cash flows later; the latter may however have greater growth and higher cash flows to compensate. Value of asset = CF 1 (1+r) 1 + CF 2 2 + CF 3 3 + CF 4 4 ..... + CF n n
Background image of page 5

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Aswath Damodaran 6 DCF Choices: Equity Valuation versus Firm Valuation Assets Liabilities Assets in Place Debt Equity Fixed Claim on cash flows Little or No role in management Fixed Maturity Tax Deductible Residual Claim on cash flows Significant Role in management Perpetual Lives Growth Assets Existing Investments Generate cashflows today Includes long lived (fixed) and short-lived(working capital) assets Expected Value that will be created by future investments Equity valuation : Value just the equity claim in the business Firm Valuation : Value the entire business
Background image of page 6
Aswath Damodaran 7 Debt and Value in Equity Valuation Assets Liabilities Assets in Place Debt Equity Discount rate reflects only the
Background image of page 7

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 8
This is the end of the preview. Sign up to access the rest of the document.

Page1 / 68

levvalue - Debt and Value: Beyond MillerModigliani A s w a...

This preview shows document pages 1 - 8. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online